The tech sector has historically been a hotbed for monster growth stocks, and that continues to be the case as artificial intelligence (AI) takes over the global economy. It's no surprise that some of the best-performing stocks in recent years have been leading chip companies.
But the investment in AI is just getting started. Nvidia (NVDA 1.02%) and Broadcom (AVGO +2.57%) continue to see robust demand for their AI products. The tech-heavy Nasdaq Composite (^IXIC +1.03%) has doubled over the last five years, but these chip stocks have significantly outpaced it and could beat it again over the next five years.
Image source: Nvidia.
1. Nvidia
Shares of Nvidia have rocketed almost 1,500% since July 2020. However, it's still growing revenue and earnings at rates that can justify more highs for the stock. After falling with the broader market earlier this year, the stock has surged to record highs.
Nvidia posted a 69% year-over-year increase in revenue last quarter, driven by strong demand for its new Blackwell computing system for advanced AI workloads. "Countries around the world are recognizing AI as essential infrastructure -- just like electricity and the internet -- and Nvidia stands at the center of this profound transformation," CEO Jensen Huang said.
NASDAQ: NVDA
Key Data Points
Huang is a CEO worth betting your money on. For more than two decades, Nvidia's main business was making graphics cards for PCs and video game consoles. But Huang expanded the company's addressable market to high-performance computing markets like data centers, which today make up nearly 90% of Nvidia's revenue.
Nvidia is now one of the most profitable companies in the world. Over the last year, it earned $77 billion in net income on $148 billion of revenue, representing a sky-high margin of 51%. The company is reinvesting those profits in more innovation. Nvidia is already ramping up its Nvidia GB300 NVL72 platform, which features 72 Blackwell Ultra graphics processing units (GPUs) and 36 Arm-based Nvidia Grace chips. This new Blackwell Ultra computing system was built for next-level AI reasoning, providing a 50-times jump in AI factory output.
The number of chips on these systems tells you why Nvidia's margins are so high. It is packaging together a bunch of state-of-the-art chips into a single platform and selling it for a premium. Apple is reportedly set to spend $1 billion on 250 GB300 systems.
Current Wall Street estimates have Nvidia's revenue and adjusted earnings growing at an annualized rate of 20% through 2030. The stock trades at a forward price-to-earnings (P/E) multiple of 38 on this year's estimate, but the P/E drops to 22 on 2030 estimates. Nvidia stock should continue to follow earnings, potentially doubling the stock within the next five years.
2. Broadcom
Nvidia isn't the only way to play the growth in AI infrastructure. There's also tremendous demand for custom AI accelerators, software, networking, and security solutions, which is benefiting Broadcom. The stock rocketed 762% over the last five years. While it may not match that performance over the next five years, it could at least double.
The company's revenue grew 25% year over year last quarter. AI chip revenue alone grew 77% year over year, and management's outlook calls for more growth in custom AI accelerators, or XPUs, and networking products for data centers.
NASDAQ: AVGO
Key Data Points
Broadcom is in a great position to meet growing demand for faster data transfer speeds for advanced AI workloads. Its new Tomahawk 6 Ethernet switch offers 102.4 terabits per second of capacity to improve computing performance.
Moreover, Broadcom expects three existing customers for its AI XPUs to deploy 1 million accelerated clusters by 2027. This demand should continue to benefit Broadcom's profitability. Management has a long record of investing in opportunities that generate growing free cash flow.
Last year, Broadcom generated $19 billion in free cash flow on $51 billion of revenue. By fiscal 2029 ending in October, analysts expect free cash flow to reach $64 billion, representing a compound growth rate of 27%.
The stock is trading at 36 times this year's free-cash-flow estimate, which is justified considering the opportunity ahead. Given the insatiable demand for AI infrastructure, Nvidia and Broadcom are not likely going to experience a slowdown in demand for their cutting-edge technologies anytime soon. AI should power the chip industry to record revenues in the coming years. Based on analysts' estimates, investors can expect Broadcom stock to double by 2030.
